US Investors Fear Recent Rallies May Have Been Overdone

Posted on | September 21, 2009 |

US equity markets kicked off the day in negative territory as investors fear the six-month rally might have been overdone and companies are now beginning to appear over-valued in relation to their earnings prospects.

‘The market is being really fuelled here by technicals and momentum,’ said David Rosenberg, economist at Gluskin Sheff & Associates in a Bloomberg Television interview. ‘It’s overshot the fundamentals. I’m a little nervous, at least over the near-term.’

Mr Rosenberg believes that a fair value earnings multiple for the S&P 500 should be 12 or 13 times. This is substantially less than current multiples; data compiled from Bloomberg reveals that the S&P 500 Index was up by nearly 20 times earnings (on a continuing operations basis) until recently, the highest level since 2004.

In the meantime, the Wall Street Journal highlights how the Dow’s 46% surge (since the trough in March) was one of just six of that magnitude in the last 100 years. All previous rallies of this scale took place in the 1930s and 1970s and each was followed by another slump, the news provider reported.

By 3.30pm (London time) the Dow Jones Industrial Average was 84.34 points (-0.86%) lower at 9737.29, while the broader S&P 500 was 10 points (-0.94%) below its previous close at 1058.55.

Resource shares were among the worst performers this afternoon, predominantly as a result of a rally in the US Dollar, which weighed on commodity prices; December Light Sweet crude oil was trading nearly 3.9% lower at $69.21 a barrel this afternoon while copper, nickel, gold, and platinum were also lower.

Shares of Freeport-McMoRan Copper & Gold traded 1.6% lower at $69.05, Newmont Mining dropped 2.6% to $43.80 a share, while energy producers Chevron and Exxon retreated 0.9% to $71.99 and 1.3% to $69.09 respectively.

House builder Lennar Corp was among the worst performers on the S&P 500 today, dropping nearly 5% to $15.72 after announcing a wider-than-expected 97 cent net loss for the three months through August. This was substantially worse than Bloomberg’s expectation for a loss of 51 cents a share.

Rival house builder DR Horton declined 2.8% to $12.88 and Pulte Homes lost 3.2% to $12.30. Bucking the negative trend in the sector was Nasdaq-listed Comstock Homebuilding Companies, which jumped 21% to $1.21 after regaining compliance with Nasdaq’s listing requirements.

Perot Systems was also in the limelight, soaring over 65% to $29.61 after Dell offered to acquire the company for $3.9 billion in cash. Dell’s shares slumped 5.5% to $15.77, however.

Nike was also higher, up 0.6% to $58.93 after Barrons reported that Nike’s share price could gain in the months ahead as earnings pressures may have peaked. The paper also flagged up recruiter Monster Worldwide. Monster’s share price climbed 1% to $17.97 this afternoon.

By Anthony Grech, Research Analyst, IG Index.

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